Regime Shifts in India's Monetary Policy Response Function

Lokendra Kumawat and N R Bhanumurthy

Working Papers from National Institute of Public Finance and Policy

Abstract: The objectives of monetary policy have always been a topic of intensive debate. This debate has resurfaced during the past few years. In India too monetary policy-making appears to have undergone significant change during the last two decades and has also been responding to changing macroeconomic environment. Against this backdrop an attempt has been made in this paper to model the monetary policy response function for India, for the period April 1996 to July 2015. Using 91-day Treasury bill rate as the policy rate, we find that the monetary policy has been responsive to inflation rate, output gap and exchange rate changes during this period. We find substantial time-varying behavior in the reaction function. The regime shift tests show that the transition is driven by inflation gap as well as exchange rate changes. Highly complex nature of dynamics of interest rate does not allow us to estimate many models, but the models estimated show that the monetary policy responds to inflation gap as well as exchange rate changes. Another important finding is that there is a high degree of inertia in the policy rates.

Keywords: Monetary policy; reaction function; smooth transition regression; India. (search for similar items in EconPapers)
JEL-codes: C22 E52 (search for similar items in EconPapers)
Pages: 21
Date: 2016-09
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-sog
Note: Working Paper 177, 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.nipfp.org.in/media/medialibrary/2016/09/WP_2016_177.pdf (application/pdf)

Related works:
Journal Article: Regime-shifts in India’s monetary policy response function (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:npf:wpaper:16/177

Access Statistics for this paper

More papers in Working Papers from National Institute of Public Finance and Policy
Bibliographic data for series maintained by S.Siva Chidambaram ( this e-mail address is bad, please contact ).